If you are a business owner, you have plenty to do simply running your business. Do you also have to be in the health insurance business? With ObamaCare requirements, it is going to become increasingly expensive to provide group health insurance coverage. One strategy many business owners are taking is setting up Defined Contribution Plans.
Defined contribution plans can be set up with a Health Reimbursement Arrangement, or HRA. This allows your business to reimburse employees for their health insurance or other medical expenses, as a tax-free fringe benefit. A health reimbursement arrangement (HRA) can provide employees with a monthly allowance with which they can buy coverage through a state health insurance exchange. An HRA can act as a business expense account specifically for health care.
The biggest hurdle involves HIPAA privacy obligations for dealing with personally-identifiable health information (PHI). These obligations apply to employers offering HRAs, which are basically self-insured health plans. And, failure to comply with HIPAA can subject a company to up to $100 per violation in civil penalties.
To avoid that, have medical expenses substantiated by a third-party. Substantiation must confirm that the expenses have a medical basis, which means dealing with the specifics that get into the realm of privacy violations.
Thus, your business must have written PHI privacy procedures and must also appoint a privacy officer. That officer needs to set up how employees can file complaints and a process for responding to complaints. It’s that officer who will be responsible for ensuring PHI is kept separate from decisions about benefits and employment.
With that handled, your business can use an HRA to reimburse employees for dental and health care on a 100-percent tax-free basis. That includes the cost of health insurance premiums. When an HRA meets three requirements, the HRA money employees receive is deductible for the business and it’s excluded from gross income for employees. Here are those requirements:
1. A medical connection must exist.
2. Employee expenses must be substantiated.
3. Employees must return amounts they receive that exceed actual expenses.
The steps to set up an HRA are straightforward:
1. Choose an administrator.
2. Setup the plan by specifying what makes employees eligible, how reimbursement works, and a monthly allowance.
3. Then, provide HRA documents to employees and enroll them.
Having employees selecting their own policy greatly reduces administrative overhead, as does having third-party oversight. HIPAA-compliant claims officers can substantiate and process employee requests for reimbursement up to the HRA balance. Once the initial set-up work is finished, the business can maintain the HRA with a minimum of time to free up HR for other work.